RISK ASSESSMENT

Acute and far-reaching crisis

In crisis since 2014, the Venezuelan economy is expected to remain in deep recession in 2018 under the impact of hyperinflation and declining oil and gas production. Despite the recent rise in oil prices, oil and gas revenues are likely to continue falling, with production collapsing (-13.5% between October 2016 and October 2017) due to a lack of investment. As oil accounts for 90% of exports, 50% of budget revenues, and almost all of currency earnings, this decline is expected to worsen the existing macroeconomic imbalances.

The non-oil economy is expected to contract further, suffering from a lack of investment following years of neglect in favour of the oil and gas sector. The difficulty of obtaining intermediate products and capital goods is undermining industrial output, because the private sector depends on the state for access to foreign currency – which has become increasingly scarce. This decline in productive capacity is taking place in a context of hyperinflation. The monetisation of the public deficit due to the decline in oil revenues has caused inflation to soar, exacerbated by the plummeting value of the Venezuelan bolivar and rocketing import prices. In this context, household purchasing power continues to be seriously diminished, and remittances from the growing expatriate population are often the main source of household income. The shortage of everyday essentials is becoming increasingly severe due to the government’s reduced import policy. Investment is likely to continue its decline in a business climate that is being undermined by the government (arbitrary expropriations, intrusive checks, and inspections by the state) and in a context of widespread political insecurity.

Fragile budget and external positions

The decline in oil revenues, together with the real-term reduction in non-oil revenues, has resulted in a rocketing of public deficit. However, the government has not reduced social spending in the same proportion. The deficit is largely being financed through monetisation, as well as via Russian and Chinese loans that are subject to “loan against oil” terms. Venezuela has been accumulating arrears on its principal payments on its sovereign and quasi-sovereign (PDVSA) debts to private creditors since the 2nd November 2017, and on payments to the Inter-American Bank of Development since the 14th December 2017. The country is facing the need to restructure its debt in order to recover access to international financing. Russia has granted it a restructuring covering USD 3.15 billion relating to payments due over the next six years. However, a more comprehensive restructuring appears to be more difficult following an unfruitful first round of meetings with creditors, while arrears keep accumulating. US sanctions against certain Venezuelan officials, including lead negotiator Tareck El Aissami (accused of drug trafficking), will prevent any US creditor from taking part in these negotiations and, hence, forbid any refinancing.

In terms of the current account, the trade balance should be slightly in surplus. This is a reflection of the contraction in imports (from USD 33.3 billion to USD 15.5 billion between 2015 and 2017) and a moderate decrease in oil exports, thanks to the recovery in oil prices. This surplus will offset the deficit in services, linked with the collapse in tourism and the cost of oil industry engineering services, as well as the high cost of debt servicing. However, the small current account surplus and the very low level of FDI will not be enough to meet the totality of the country’s payment deadlines. This could still help soften the decline in currency reserves (at USD 9.9 billion in November 2017, including gold), even though it will not stop a further decline of the bolivar, due partly to capital outflows.

In order to reduce the gap between the official rate and the black market rate, the government devalued the bolivar by 99.6% in February 2018 via the introduction of a new auction system: the Dicom. Significant efforts are being made at the same time to fight the black market. This has translated in an intervention in one of the country's major banks to control current account transactions attributed to the black market. The authorisation has also been granted to officially exchange expatriate remittances at a lower rate than the official rate (but still higher than the black market rate) in order to attract some of the remittances into the official foreign exchange reserves. However, these measures have not restored confidence in the monetary system, and the unofficial exchange rate keeps rising (approximately VEB 3.5 million for USD 1 mid-July 2018).

Tense political situation

2017 was a year of rising political tensions resulting from the economic crisis, to which the government has so far been unable to propose a solution. The election of a Constituent Assembly in August 2017 was preceded by three months of conflict between government forces and supporters of the opposition, resulting in over a hundred deaths. This new assembly, which favours President Nicolás Maduro (Partido Socialista Unido de Venezuela, PSUV) because it was boycotted by the opposition, has been trying to take power away from Congress – which is dominated by the opposing Mesa Unitaria Democratica (MUD) coalition. An example of this was the announcement of Congress dissolution in August 2017. However, the wave of international outrage following this, accompanied by demonstrations within the country, forced the government to rescind the announcement – without actually defusing the situation. Elections of regional governors in October 2017, largely won by the governing PSUV party, strengthened the hand of President Maduro by highlighting divisions within the opposition. The decision by four governors – each members of MUD – to be sworn in by the Constituent Assembly generated considerable disagreement within the MUD coalition, as the vast majority of its members claim that the Assembly is without any legitimacy. The victory of the PSUV in the municipal elections in December 2017, boycotted by the opposition, further exacerbated these tensions. The government began to respond to the opposition’s criticisms in November 2017 by agreeing to intensify the fight against corruption, beginning with the arrest of senior oil industry executives.

Despite a very low turnout (46%), divisions within the opposition allowed Mr Maduro to win the May 2018 presidential elections, which were strongly criticised by international observers for their lack of transparency.

On the international scene, the government is trying to get closer to Russia and China in order to gain access to financing, while the EU and the United States, along with a majority of Latin American countries, are imposing sanctions against the country – although they have not gone as far as stopping oil purchases entirely.